S&P 500 Retreat May Accelerate on NFLX, IMF Gives Trump Dollar Ammo
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S&P 500 Talking Points:
- CSX earnings offered a second economic impact on lower guidance, but it is may be Netflix that truly hits markets through risk appetite
- Trade war references from earnings and Fed Beige Book pale in comparison to influence from IMF's External Sector Report
- President Trump could find cannon fodder for his push for a cheaper Dollar after the IMF says it may be 6 to 12 percent overvalued
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CSX Stirs Growth Concerns but NFLX May Hit Markets Where It Really Hurts
US earnings season continues to offer unintended signposts for global financial market pressure points. While Wednesday's run didn't have the same density of high-level updates as the day before, what was present was significant - and may power the market through the upcoming session. With few banks of heft reporting, the focus shifted away from speculation of Fed forecasts and its impact to a more traditional growth assessment. Railroad shipping firm CSX issued its numbers the day before, but its fallout wasn't registered until Wednesday's trade. The impact was ultimately severe with a gap lower and tense follow though. The real hit came with the firm's drop in guidance due to what the CEO described as a "puzzling" economy.
Chart of CSX Stock Price and Opening Gaps (Daily)
Alone, this company's performance and warning are not enough to derail the outlook for the US or global economies; but it is yet another unflattering milestone that builds upon a very troubled road that has started to take traction in many investors' fears. If there is an earnings update that has a more systemic impact on confidence this week, it would be Netflix. The streaming video company is one of the vaunted FAANG members - the large market cap tech companies that seemed to collectively control the market's confidence. If we follow the trail to the core of speculative sentiment, we find the US equities market has soundly outperformed most other global assets that carry the 'risk on' banner, which then has the tech sector within the next sphere of influence and those FAANG members at the symbolic yoke. Following that line of emphasis through the market's decade-long bull run, it is perhaps easier to understand the risk of toppling dominoes that could eventually end in a full deleveraging of excess risk. After hours, Netflix shares tumbled 12 percent on what was generally moderate numbers (in GAAP terms). It will be important to watch the US open for any signs of contagion.
Chart of Netflix, FAANG Index and Nasdaq 100 Index (Daily)
The IMF Weighs In On Trade Wars, Finds It is All Pain
There were a few other measures that would speak to growth this past session with either a dubious or overtly unflattering perspective. The Federal Reserve's Beige Book - the report that gave an economic assessment from which officials can determine their views on monetary policy - offered a surprisingly optimistic outlook for US GDP. I say it is 'surprising' because they seem to have already signaled an intent to cut, certainly the market read that with a implied rate forecast through Fed Fund futures showing a 100 percent probability of a 25 bp reduction in two weeks. Yet, easing monetary policy when it is still exceptionally accommodative (globally and via balance sheet) would insinuate conditions are poor. In the the meantime, the Fed's report would also make clear its concern about the state of the trade wars and the broad risk it represented to the future. But again, they are optimistic on growth...
US Treasury 10-Year to 3-Month Yield Spread (Daily)
A more tangible assessment of the troubles that lie ahead through both growth and strained trade relations was the IMF's External Sector Report. Insight that deserves frequent reiteration was the excess leverage that the financial system sits on. They would report net creditor/debtor positions at a historical 20 percent of GDP. We are facing extreme leverage in markets, central bank exposure, government and consumer debt. Much can go run under those conditions. Meanwhile, the semi-regular trade and currency report was fairly straightforward on its warnings to the state of trade. The group has said trade wars could lead to a $455 billion loss in GDP next year through a general depression of global trade and that the measures implemented thus far have done little to rebalance external imbalances. By their estimation, China's surplus was more in-line with its fundamentals - an assessment that will not sit well with the Trump Administration that has argued vehemently to the contrary.
Chart of S&P 500 and NYSE Broker Level Leverage (Montly)
Another Assessment from the IMF May Encourage Trump to Double Down on Weakening the Dollar
Where President Trump may not appreciate their view that trade inequity was moving more towards balance, he would certainly appreciate their evaluation that the US Dollar was potentially 6 to 12 percent overvalued. That would be a significant adjustment for a currency if it were to rebalance - especially the world's most liquid. Trump has repeatedly claimed that the local currency was misaligned to fundamental value with frequent pressure applied on the Fed to correct the balance through monetary policy means and reportedly tasking aides with investing means to devalue within his control when that didn't work. This third party talking point may embolden his efforts. It is worth noting that the IMF also found that the Euro and Yuan - the two countries the President accused explicitly of artificial manipulation - were fairly valued, but the Administration would not likely get tangled up in that detail.
Chart of DXY Dollar Index and 6 to 12 Percent Discount (Weekly)
From more traditional (natural) drivers for the benchmark currency, there is not much in the way of systemically-important scheduled event risk. This past sessions housing and building permits offered a painful retreat, but that is only another pebble in the growth concern bucket. The next 24 hours is unlikely to offer anything to make a volatility meal out of. The most prominent offering on tap will be Friday's University of Michigan consumer confidence survey, but even that will struggle for impact. Monetary policy anticipation has too often struggled to direct the market's course lately to reasonably expect it to suddenly retake control when no major event is on tap. There is also the potential for Greenback to draw capital that is fleeing other troubled currencies, but those winds are not presently overwhelming.
Chart of DXY Dollar Index and Expected Rate Change Beween ‘Now’ and End of July (Daily)
Sterling Tumble Takes a Pause, Euro and Loonie Refuse Inflation Data, Watch Gold
Looking outside the systemic currents, we find more of the key markets are either pausing, powering down or building pressure. For the Sterling's incredible multi-month slide, the currency managed to find a speculative ledge this past session. Perhaps Conservative Party leader Boris Johnson's remarks that a Brexit deal by October 31st was taken a signal that he would make a greater effort to avoid a 'no deal' outcome, but measures of market sentiment around the divorce (like the Bloomberg Brexit Barometer) show no foothold for genuine speculative anticipation for an easier path forward. Ahead, we have UK retail sales that could leverage the same surprise level of activity as the US report, but I will withhold anticipation. The Bank of England's (BOE) bank liability and credit conditions report hits closer to home, but even financial stability in the face of Brexit is not proving particularly market moving.
Chart of GBPUSD with 20-Day Moving Average (Daily)
IF there was a theme in data this past session, it would have been inflation. The wide run of UK price pressures was a mixed bag with a notable easing upstream (retail, producer and house prices). That isn't enough to change the game for the BOE and challenge Brexit however. Euro-area CPI was little change from previous and met expectations. There are few pressing themes on the second most liquid currency that could reasonably spur the Euro to action beyond its role as an available counterpart beyond meaningful shifts in European Central Bank (ECB) rate expectation. I afforded my greatest expectations for economic impact through data to the Canadian inflation statistics given the Bank of Canada (BOC) remains one of the most resistant policy authorities to a seemingly universal dovish outlook. Though that may be the case, the CPI figures did not generate significant surprise nor turn rates off course.
Chart of EURCAD with 200-Day Moving Average (Daily)
If there is one market that has both high breakout potential and can also reasonably be expected to establish trend with a little fundamental coaxing, it is gold. The precious metal has spent the past weeks building up pressure in a contracting wedge following months of climb. A breakout is inevitable - and may already be setting into gear with this past session's close above 1,425. Yet, it is the potential for run after the technical boundary is breached that makes this market particularly interesting. While offering its own appeal, it is the signal capacity of this commodity as a safe haven specifically oriented towards financial instability amid the devaluation of sovereign assets that most interests me. It is worth noting this is one of the few assets that holds a positive correlation to its personal implied volatility measure. We discuss all of this and more in today's Trading Video.
Chart of Gold with CBOE’s Gold Volatility Index (Daily)
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